Consider this conundrum: derivatives trading is complex and meant for sophisticated investors, mainly institutions. Trading volumes are large. The two national bourses notch up a combined daily turnover in excess of Rs 20,000 crore (Rs 200 billion) during a bull market. Yet, the regulator says that a considerable chunk of this trading volume is generated by retail investors.

Demat accounts statistics, however, suggest that India does not have more than five million active investors, so how does one explain such large retail trading volumes?

Large brokers insist that retail investors trade actively in derivatives because the margin is an insignificant 15 per cent. But ask around and you will come across very few investors who even understand derivatives trading.

On the contrary, various investor surveys suggest that retail investors subscribe to initial public offerings and hold on to the shares.

Girish Mittal, a high networth investor, provides a clue. He says, "I am besieged by calls from various brokerage firms wanting to assign me an equity adviser or a relationship manager" who would offer telephonic investment tips.

He asks if Securities and Exchange Board of India rules allow relationship managers to dispense investment advice even if the broker is registered by the Sebi to offer portfolio management services. The answer is a clear no; there are specific operating rules for PMS registration and services.

Relationship managers are expected to persuade people to increase their trading business. Larger firms consciously hire Pretty Young Things in the belief that they are more effective.

Once a person signs on, a barrage of helpful stock tips lures him/her to trade more actively earning higher brokerage commissions for the firm. Once the initial tips pan out successfully, these clients are persuaded to hand over larger sums of money or sometimes their entire investment portfolio, including long-term shareholding, to be managed by the broker.

Over time, traders make investment decisions and merely inform clients or seek telephonic confirmation. Investors must remember that large brokerage firms record all conversations from trading room telephones in order to create records and audit trails in case of disputes.

Others ensure that they book profits on successful transactions, issue cheques and get clients to sign confirmation letters intermittently. When the going is good and stock indices are spiralling upwards, everybody is happy. The profits vanish in every bout of violent turbulence.

Within this broad framework, there are differing degrees to which investors can be short-changed. Some brokers are known to charge 10 per cent of the mark-to-market profit, claiming to offer PMS services.

One angry investor complains that his brokerage built positions of Rs 21.85 lakh (Rs 2.2 million) on his original investment of Rs 300,000 without even collecting margin money.

The brokerage firm insists he had telephonically approved of this high leverage. A sharp market correction caused him a loss of Rs 525,000, which he blames on the broker.

He supports his allegation saying the firm once bought Sun TV shares for him at 11.30 a.m. and sold them off at 11.37 a.m. Can this qualify as portfolio management? Or is it active speculation or momentum trading? The investors are not entirely blameless.

When such trading generates profits, they fail to do the math or even work out the fact that brokerage commissions -- even at today's low rates -- are often higher than their profits. Their investigations begin only after the brokerage firm has wiped out their portfolio and they need to cough up more money.

At that time, you hear the constant whine that they do not even understand how derivatives trading works. Indeed, they don't and most often their 'relationship manager' would have convinced them that they cannot possibly lose. The dice is always loaded against the investors.

I know specific examples of retired school teachers, software engineers, doctors and property developers who lost their money this way. The total investments are usually anywhere between Rs 300,000-10 lakh. There is also the true story of a woman who parted with Rs 500,000 saved for her son's medical school admission to a sub-broker recommended by a close family friend.

She lost the entire amount, instead of being able to double it, as promised. This story has a slight silver lining because the principal broker passed the hat around and paid the son's college fee of around Rs 200,000, but the rest of the money was gone. The unrepentant sub-broker brandished the rule-book pointing out that he had been careful enough to obtain signatures and confirmations from the woman when her investments were profitable and, hence, in the clear.

In case of the routine arbitration that follows investor complaints, the broker thus escapes liability. In this case, the sub-broker was sacked.

One brokerage firm is so tired of the problems arising from its franchisees and branch offices pretending to offer PMS that its letter confirming the opening of a new account has a standard disclaimer.

It says, "We do not indulge in Portfolio Management Services. We are retail investors and do not handle Client Funds for Investment/ Trading. Hence, any assurance by any sub-broker or any person on our behalf offering assured profit will not be binding on us. Further, we wish to inform you NOT TO KEEP your signed Delivery Instruction Book with your sub-broker/franchisee/Branch or any other person. In case of discrepancy, we shall not be responsible for any misuse of your DIB".

All this is under the bold heading - Important points to be noted by constituents/investors. The disclaimer, in a nutshell, tells you everything that is wrong with the retail business today and how investors are lured to part with their money.

The same broker, who runs a retail brokerage firm says, "Let me admit there is also a lot of pressure from clients to offer such services and offer SMS tips for trading". He says, not only does the broker earn out of generating trading volumes, but even the government and the exchanges earn a percentage of the volume generated.

So the regulator may prohibit brokers from giving advice to generate brokerage commissions, but the pressure to do so is high.

Thousands of new investors have again lost their savings to the stock market turbulence in the middle of March. Most will file complaints with the regulator and sometimes the brokerage firm may even be persuaded to settle a few disputes by writing off its claims.

The only way to avoid such heartbreak is not to be na�ve and foolish with your money and expect someone to make a millionaire out of you without understanding the risks involved.

So far, the regulator has had little sympathy for such recklessness on the part of investors, although when the number of complaints has soared, the broker loses the benefit of doubt and in that case -- as happened with India Bulls -- the regulator has cracked the whip and demanded resolution of complaints.